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A real loss on the sale of the property is recognized

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Unformatted text preview: ue of $600,000 (original cost was $950,000). Delta immediately leased the plane back for a noncancelable period of 10 years beginning immediately. The estimated remaining life is 10 years. Annual lease payments are $133,155 beginning on Jan. 1, 2050. Delta’s incremental borrowing rate and Citibank’s implicit rate in the lease is 10%. Delta uses straight line depreciation Chapter 15-114 Set up an amortization table for the Lease Obligation. Effective-Interest Method Chapter 15-115 On Inception of the sales-Leaseback Dec 31, 2050 Description Debit Credit Cash 900,000 Accumulated Depreciation 350,000 Equipment Deferred Gain on Lease Capital Lease Description Debit 950,000 300,000 Credit Chapter 15-116 Lease Equipment Lease Payable Lease Payable Cash 900,000 900,000 133,155 133,155 Sales-Leaseback To record Payment on December 31, 2051. GENERAL JOURNAL Date Description Debit Credit 12/31 Interest Expense Lease Payable Cash 76,685 56,470 133,155 Chapter 15-117 Sales-Leaseback On December 31, 2010 to record (1) depreciation and (2) recognizing gain. GENERAL JOURNAL Date Description Debit Credit Dec 31 Depreciation expense Acc depreciation 90,000 90,000 Deferred Gain on Leaseback30,000 Dep. Expense 30,000 Chapter 15-118 What If What would have happened if Delta had just kept the plane and borrowed $900,000 on December 31, 2050 at the same interest rate? would have been $60,000 Recall carrying value was $600,000 with a 10 year useful life expense would have been on the same amortization schedule Depreciation Interest Chapter 15-119 What If? After end of 1 year Retain Asset and Borrow $900,000 Assets Leased Asset Asset Less Acc. Depreciation Less Deferred gain on Leaseback Book Value of Asset LIABILITIES Lease Payable Note Payable $710,375 $710,375 $540,000 $950,000 (410,000) (90,000) (270,000) $540,000 $900,000 SalesLeaseback Chapter 15-120 Real Estate Leases Real estate leases involve land – exclusively, or in part. Only the first (title transfers) and second (BPO) classification criteria apply in a land lease. When (a) the leased property includes both land and a building, (b) neither of the first two criteria is met, and (c) the fair value of the land is 25% or more of the combined fair value, both the lessee and the lessor treat the land as an operating lease and the building as any other lease. Usual lease accounting procedures apply to leases that involve only part of a building although extra effort may be needed to arrive at reasonable estimates of cost and fair value. Chapter 15-121 Special Leasing Arrangements Leveraged Leases – a third-party, long-term creditor provides nonrecourse financing for a lease agreement between a lessor and lessee. The lessor acquires title to the asset after borrowing a large part of the investment. Chapter 15-122...
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